WeekWatch (13/05/2019)
All diplomacy is war by other means.” So said Zhou Enlai – the architect, alongside Henry Kissinger, of the very first rapprochement between the US and the People’s Republic of China, one that found its climax in Richard Nixon’s visit to China in 1972. Since then, diplomatic shuttling between Washington and Beijing has only intensified, and generally with peaceable words.
Donald Trump has adopted more bellicose language, publicly criticising China for the lopsided nature of US-China trade and for its intellectual property violations. Last week, he finally delivered on threats to ratchet up tariffs yet further, following China’s reported willingness to renege on intellectual property commitments made during the negotiations.
As a result, $200 billion of Chinese imports to the US will be subject to a rise in tariffs from 10% to 25%, although only on those goods to leave Chinese ports from last Friday onwards. China’s Ministry of Commerce released a statement on Friday saying it would take “necessary countermeasures”.
The impasse was immediately felt on markets, and the S&P 500 did indeed end the week down. The FTSE 100, EURO STOXX 50, Japan’s TOPIX and the Shanghai Composite indices all felt its effects. However, the market ripples soon faded to nothing, with the trade war just one reason among several that these indices ended the week down.
A few emollient words from both sides in the hours after the announcement presumably raised hopes that a deal will ultimately be struck, and a full-blown trade war avoided. There is certainly potential for further damage; according to Oxford Economics figures, the current tariffs exchange could soon engulf almost $800 billion of trade.
For global investors, both countries are too large to ignore, and China continues to offer enormous growth potential, despite the dizzying GDP rates achieved in the past few decades. More negatively, China is vulnerable to US sanctions, and it has largely spent its stimulus budget for 2019 in the first quarter (partly in a show of strength as the US threatened it with tariffs). All the same, there are reasons to think it is not as vulnerable as most emerging markets.
“China really isn’t an emerging market anymore,” said Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund. “It’s got a very large consumption class of 300 million middle class consumers, probably moving to 600 million in the next five to ten years. We are very optimistic on China and are not worried about the strong dollar effect – we are more concerned about trade wars and the short-term economic cycle.”
The US had other worries abroad too, notably in North Korea, Iran and Venezuela. Yet there was plenty for domestic US investors to think about too.
Kraft Heinz, already reeling from reporting a $12.6 billion loss in the final quarter of 2018, said it would have to restate its earnings for the past three years after finding errors in its procurement procedures. It also emerged that the US’s main financial regulator has expanded its inquiry into the food major. A former Goldman Sachs banker, meanwhile, pleaded not guilty in a New York court to embezzling $2.7 billion in Malaysia’s 1MDB scandal (a broader corruption story too far-fetched for fiction).
Investors were particularly focused last week on Uber’ IPO. Despite setting its shares at a relatively conservative level of $45 – putting the company’s total value at $82 billion – the price dropped more than 7% on its first day of trading. It is one of several ‘unicorns’ – start-ups valued at over $1 billion – founded in the throes of the financial crisis and marks the biggest tech IPO since Facebook’s. Uber’s listing also adds to what is quickly turning into a bumper year for IPOs. Lyft, a ride-hailing company, went public in March; last week, delivered its first post-listing profits report, which included a significant operating loss. Investors sold the company down by 11% on the news.
Growth and jobs figures for the US recently came in strong once again, and Friday’s UK growth and employment figures were likewise encouraging, but there were also positive signs last week in the eurozone. Germany’s exports were stronger than expected, its youth unemployment rate fell to almost pre-crisis levels and most European companies are beating their first quarter earnings forecasts.
That will come as some relief as Europe gees itself up for the prospects of European Parliament elections next week. The latest analysis shows that, in the UK, the Tories are on track for the lowest share of a national vote by any governing party in UK history – another post-referendum accolade to add to the list. Polls now suggest that more than half of those who voted Conservative in 2017 plan to vote for Nigel Farage’s Brexit Party this month – the latter is set to gain more seats than either Labour or the Tories. Meanwhile, Brexit talks between the government and the Labour Party show few signs of bearing fruit, and Keir Starmer said on the weekend that a confirmatory public vote would be needed for any such deal.
Magellan is a fund manager for St. James’s Place.
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